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Delta Again Tops Bag Fee Collection

The second largest U.S. airline Delta Air Lines Inc. (DAL) has once again emerged as the highest collector of baggage fees for the first half of the year.

According to the Bureau of Transportation data, Delta collected about $430 million in baggage fees for the first six-month period. The company is leading the airline industry as a top collector for more than three years in a row. Delta collected baggage fees of about $863 million in 2011, $952.3 million in 2010 and $481.7 million in 2009.

Delta accounted for one-fourth of total fees collected by the U.S. industry in the first half of 2012. The industry had collected more than $1.7 billion in baggage fees from passengers. This is the highest fees ever collected by the industry in the first half of a year.

The largest U.S. airline United Continental Holdings Inc. (UAL) was the second highest collector with nearly $351 million in fees for the same period. American Airlines, a wholly owned subsidiary of AMR Corporation (AAMRQ) was not far behind and collected fees worth $288.0 million in the six-month period. US Airways Group (LCC) was fourth in the row with total fee collection of $261 million.

We believe Delta’s trend of being the top performer in baggage fees collection will continue in the future as well. Delta Air Lines is progressing well on improving ancillary revenues by adding new features to its services as well as expanding new products.

The company is expanding seating facilities as well as installing winglets and WiFi connectivity in the fleet. It is going wireless with in-flight entertainment system - Delta Connect. While these efforts would generate additional revenue of $1 billion by 2013, we believe upgrading of fleet products and services would dilute short-term margins and profitability.

We are maintaining our long-term Neutral recommendation on Delta Air Lines. For the short term, the company retains a Zacks # 4 (Sell) Rank.